CHINESE UPDATE – People’s Bank of China Announced Financial Support Polices on Shanghai Pilot Free Trade Zone
Highlights: On December 2, 2013, the People’s Bank of China (“PBOC”) released its Opinions on the Financial Support of the Development of the China (Shanghai) Pilot Free Trade Zone (the “FTZ”) (the “Opinions”). The Opinions committed to the promotion of reforms and pilots in the FTZ in the sectors of cross-border RMB usage, RMB capital account convertibility, interest rate liberalization and foreign exchange administration. The Opinions give a roadmap of financial reforms in terms of cross-border RMB usage and RMB capital account relaxation on one hand, but on the other hand lay out to some extent the boundary of financial reforms to be launched in the FTZ.
PBOC Announced Financial Support Polices on Shanghai Pilot Free Trade Zone
On December 2, 2013, the People’s Bank of China released its Opinions on the Financial Support of the Development of the China (Shanghai) Pilot Free Trade Zone. The Opinions committed to the promotion of reforms and pilots in the FTZ in the sectors of cross-border RMB usage, RMB capital account convertibility, interest rate liberalization and foreign exchange administration.
The Opinions did not offer a timetable for issuance of detailed implementing rules. On the second day after the Opinions were released, PBOC Shanghai branch informally gave a preliminary schedule to media: (1) most of the upcoming policy initiatives are expected to be implemented within the next three months; (2) those implementing rules would be subject to test and exploration for about half a year to gain experience, and; (3) if the experiments work, the authorities expect to establish, within one year, a financial administration model that is may be duplicated and extended to other regions of China.
Summary of Policy Initiatives in the Opinion
We touch on a few of the significant policy initiatives in the Opinions below:
Free Trade Accounts
At the heart of the Opinions, PBOC establishes a specially tagged bank accounts system for use of such special accounts by companies and individuals in the FTZ in relation to those financial innovation activities allowed in the Opinion.
- Residents in the FTZ will be allowed to open Free Trade Accounts for Residents (“Residents FTA”), while non-residents will be allowed to open Free Trade Accounts for Non-residents (“Non-residents FTA”). Free fund transfers are only permitted for those between Residents FTAs and offshore accounts, non-residents’ onshore accounts, Non-residents FTAs and other Residents FTAs, while the fund transfers between Residents FTAs and other on-shore accounts are still subject to the current cross-border fund transfer restrictions. All commercial banks in the Shanghai area can open Free Trade Accounts for its FTZ qualified clients by way of setting up a unit using a separate account management system.
Cross-border Investments and Financing
The most significant changes PBOC laid out are those that concern cross-border investment. In this area, the Opinions echo the “Specific Measures Supporting and Promoting the Development of the Pilot Free Trade Zone” released by the China Securities Regulatory Committee (“CSRC”) on September 29. However, various qualifiers and terms used in the Opinions are still short on specifics, and need to be fleshed out by PBOC in the implementing rules. It remains to be seen to what extent PBOC will lift its sharp limits on funds entering and leaving China for securities investments.
- “Qualified” Chinese individuals who are “working in” the FTZ will be allowed, in accordance with “relevant rules”, to invest in overseas securities market and transfer their after-tax income earned within the FTZ to offshore accounts. Similarly, “qualified” foreign individuals who are “working in” the FTZ can open non-resident individual domestic investment account to, in accordance with “relevant rules”, make investment in China including securities investment.
- Financial institutions and companies in the FTZ will be allowed to invest in Shanghai’s securities market in accordance with “relevant rules”.
“Qualified” companies in the FTZ will be allowed to directly invest in overseas capital markets including the derivative markets in accordance with “relevant rules”.
RMB Cross-Border Usage
- Commercial banks in the Shanghai area can directly process cross-border RMB settlement related to current accounts (as opposed to capital accounts) and direct investment transactions upon customers’ instructions, on the basis of “know your customer”; “know your business” and “due diligence review” principles, unless the instructing entity is on the “export trading RMB settlement entities watch list”. This reform aims to promote the usage of cross-border RMB in both investment and trade settlement by adopting a macro supervision system.
- PBOC permits financial institutions and companies in the FTZ to borrow RMB funds from offshore markets, but meanwhile, re-emphasizes that those funds cannot be invested in securities or derivatives, nor be used for trust loans.
Living Monitoring of Fund Flow
- PBOC will establish a living monitoring mechanism towards fund flow in the FTZ. PBOC may, at its discretion, put forth stronger supervision of short-term speculative fund flows in the FTZ, and even take temporary control measure against such fund flow.
The list of reforms unveiled by PBOC addresses in more detail the previous scope of reforms in the blueprint of FTZ issued by the State Council on September 27. The Opinions give a roadmap of financial reforms in terms of cross-border RMB usage and RMB capital account relaxation on one hand, but on the other hand lay out to some extent the boundary of financial reforms to be launched in the FTZ.
In relaxing some controls, PBOC also made clear that it would not allow FTZ become a back door to circumvent long standing capital control. PBOC will continue to closely monitor the fund flows between the FTZ and the rest of China.
- There has been increasing uncertainty about the circumstances in which foreign investors in A-REITs need to notify their investment to FIRB and seek the Treasurer’s approval.
- To address this, FIRB has published a press release providing a safe harbour for foreign investors and issuers in which acquisitions of units in listed and other public A-REITs will not need to be notified to FIRB.
- The safe harbour applies to acquisitions:
– by foreign private investors;
– of passive interests (10% of a listed trust, 5% of other public trusts with more than 100 members);
– in a trust whose assets comprise predominantly non-residential real estate.
On 1 August 2013, FIRB issued a press release, ‘Treatment of Foreign Passive Investments in Public (Real Estate) Unit Trusts’, clarifying the circumstances in which acquisitions of units in Australian urban land trusts will not need to be notified to the Foreign Investment Review Board (FIRB).
The Treasurer also announced plans to amend the exceptions in the Foreign Acquisitions and Takeovers Regulations 1989 (Cth) (the Regulations) for acquisitions of interests in Australian urban land trusts after public consultation. These amendments, once in force, will replace the FIRB release, which applies in the interim only.
These measures provide welcome clarity both for investors in A-REITs as well as issuers. Recently the existing exemptions in the regulations had come to be increasingly narrowly applied, leading to uncertainty about when foreign investors need to notify FIRB.
Under section 26A of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the Act), acquisitions of interests in Australian urban land must be notified to FIRB and approved by the Treasurer. Failure to notify is an offence attracting potential penalties including fines and imprisonment. The Treasurer also has the power to make remedial orders to unwind acquisitions of Australian urban land which the Treasurer considers not to be in the national interest.
Interests in Australian urban land are defined so as to include, among other things, units in Australian urban land trusts (being trusts for which interests in Australian urban land comprise more than 50% of total assets).
This means that, unless an exemption applies, acquisition by a foreign investor of just one unit in an Australian urban land trust must be notified to the Treasurer under section 26A.
The Regulations provide a number of specific exceptions applicable to acquisitions of units in certain, primarily commercial Australian urban land trusts. However, these exceptions reflect the market conditions and regulatory regime of the time when they were introduced (1989) and have become increasingly difficult to apply.
Scope of FIRB release
The FIRB release provides foreign investors who acquire units in certain Australian urban land trusts with a safe harbour in which the Government will take no action.
To come within the safe harbour, an acquisition must satisfy all of the following conditions:
- Foreign private investor: The acquirer must be a foreign person or foreign corporation that is not a foreign government or related to a foreign government.
‘Foreign governments and their related entities’, as defined in Australia’s Foreign Investment Policy 2013 (the Policy), will continue to be subject to the stricter requirement under the Policy that they notify and obtain approval for any acquisitions of Australian urban land set out in the Policy.
- Passive interests: Only ‘passive interests’ will come within the safe harbour. For an acquisition to be passive, the holding of the acquirer, together with its associates, in the Australian urban land trust must not exceed:
– in the case of a listed trust – 10% of the units in the trust; and
– in the case of other public trusts with at least 100 members – 5% of the units in the trust.
However, an interest of less than the relevant percentage may be regarded as not being passive if there are special circumstances, (eg, where the investor is building a strategic stake, or is able to influence or control the trust beyond their ordinary voting power.
The approach taken is similar to that taken in the Policy to defining ‘direct investments’. In that context, an investment will be regarded as being direct, and not merely passive, where the interests acquired have preferential, special or veto voting rights, where the investor has the ability to appoint directors, or where there are other contractual arrangements (such as loans, services agreements and off-take agreements).]
- Predominantly non-residential land: The safe harbour is only available where the acquisition is of units in an Australian urban land trust which comprises predominantly non-residential land. Slightly different tests apply for listed trusts and other public trusts.
– For a listed trust, the portfolio must comprise predominantly non-residential property comprising office, retail, industrial or specialised properties (or a mix). Where a listed trust contains some residential property, it will be necessary to make an assessment whether non-residential property of the relevant types is predominant. If in doubt, investors are invited to discuss their situation with FIRB.
– For other public trusts, developed residential real estate assets acquired from non-associates must comprise less than 10% of the trust’s real estate assets. Residential real estate assets developed by the public trust itself or by associates can exceed that percentage.
Implications of FIRB release
The practical effect of the safe harbour provided by the FIRB release is that retail and institutional investors in listed and certain widely held unlisted A-REITs will generally be able to acquire and deal with their investments without having to notify FIRB so long as their stake remains below the relevant percentage. Only where an investor seeks to exceed that percentage, or seeks arrangements to exert additional control or influence over the A-REIT, will they need to notify FIRB and obtain approval.
These changes provide welcome certainty for international institutional investors, who can safely make and deal in passive investments in A-REITs. It also provides clarity to issuers, who can market a capital raising to foreign institutional investors and issue securities to them, without exposing the investors to the risk that they may need to notify FIRB and obtain approval before investing.
Executive Summary: Although Spain’s current microeconomic situation is still critical, the macroeconomic framework is more stable; it appears that Spain is once again becoming regarded as a safe jurisdiction for investors. This stability, together with a steep fall in valuations, is reinvigorating the market, and investors have begun looking at future investment opportunities. This article, first published in The Foreign Investment Regulation Review, Edition 1 and reproduced with permission of Law Business Research, introduces Spain’s foreign investment regime, typical transaction structures, the review procedure by the relevant competent authority and foreign investor protection, as well as a projection of potential trends in this area.
Executive Summary: The Hungarian Competition Authority (“GVH”) amended the documents – including the merger filing form – related to merger control proceedings in the summer of 2013, with the declared aim of further decreasing the administrative burdens placed on market players.
Further to the amendments of the merger documents, amendments to Hungary’s Competition Act (“CA”) have just been adopted by the Hungarian Parliament. One of these changes affects the suspension clause in merger control proceedings.
The GVH aims to increase the scope of Phase I merger control proceedings (which results in a shorter deadline and lower filing fee) and to decrease the scope of the data to be submitted in merger control proceedings by simplifying and harmonizing the merger documents.
The amendments also support harmonization with EU laws and practices, as the European Commission has also initiated a simplification of the EU merger control procedures.
What changes do the amendments in merger documentation bring about in practice?
- The most significant change with regards the Hungarian merger control documents is the increased scope of Phase I proceedings. For non-horizontal mergers (i.e. when a company acquires e.g. a non-competitor company to whom it has other ties, such as being vertically related), the threshold for applying the simplified (i.e. cheaper and shorter) Phase I proceeding has been raised from 25% to 30% combined market share. In practice, this means that if the combined market share of the merging undertakings is between 25% and 30%, the deadline by which the GVH must issue a ruling on the concentration is 45 days instead of 4 months and a filing fee of HUF 4 million (ca. EUR 13,500) is applicable instead of HUF 16 million (ca. EUR 53,500). Moreover, the GVH has introduced the possibility of a Phase I proceeding even above 30% market share under certain circumstances. Nevertheless, the 20% market share threshold for horizontal mergers has not changed: if a market player with 15% market share on the relevant market acquires its competitor of 10% market share, this merger would continue to fall under the – longer and more costly – full procedure.
- The other changes are more of a fine-tuning of the merger control documents that had been issued in 2012 and involve inter alia the following:
- The removal of some questions from the merger control filing form, as well as the shortening of other questions (e.g. less data to be provided in order to assess the EU Commission’s jurisdiction), which will ease the burden on the companies participating in merger control proceedings;
- The amendment of the Best practice guidelines on preliminary consultations to emphasize that the GVH can provide preliminary guidelines and recommendations, but can only undertake an assessment on the merits in the formal merger control proceeding;
- The supplementation of the conditions of the application of a simplified decision – originally introduced in 2012 – in the form of a notice. In a simplified decision, the GVH does not provide the reasons for its (clearance) decision when certain conditions are fulfilled. The advantage of this approach is generally faster decision-making by the GVH. This must be balanced by the interest of the parties involved to learn the reasons for the GVH’s decisions and to be able to ascertain the regulator’s evolving legal practice.
- Harmonising the simplified and full proceedings (i.e. Phase I and Phase II) with the conditions of the short and full filing form. The GVH has amended the merger control filing form and its explanations with regards to the short filing form. Although the threshold under which parties can resort to a short filing form (i.e. not having to fill out sections VI and VII of the filing form with detailed market data) has now been raised in vertically related markets from 20% to 25%, the GVH has introduced an amendment under the umbrella of harmonisation of the two documents that is likely to make undertakings less happy. The reason is that there are constellations which would result in the having to fill out the full filing form now where a short filing form was sufficient earlier.
The changes are generally to be welcomed, especially considering the fact that the GVH acted within just over a year after introducing these set of merger control documents.
However, a more client-friendly and less formalistic application of the GVH’s procedures would benefit market players even more. Market players would welcome if case handlers more regularly applied the rule of applicants not having to answer all questions on the filing form if specific questions are irrelevant; doing so saves companies from the further costs and time spent answering additional data requests for information not necessarily relevant for assessing the concentration. The new filing form is in use since 1 August 2013, whereas most of the other changes are applicable since June 2013.
Changes to the Hungarian Competition Act
Further to the above mentioned amendments of the merger documents, amendments to Hungary’s Competition Act (“CA”) have been adopted in November 2013 by Hungarian Parliament. One of these changes affects the suspension clause in merger control proceedings. Such clause is to be firmly introduced, but the changes raise some questions.
The current Hungarian CA does not contain an explicit suspension clause, i.e. it does not explicitly prohibit the implementation of a transaction (that meets the turnover thresholds) before its approval by the Hungarian competition authority (GVH).
Instead, the CA currently
- sets out that the GVH’s (i.e. third-party) approval is required for the coming into existence of the contract resulting in a concentration. This provision, however, is commonly interpreted to mean that the closing of a transaction without prior approval is permissible at the parties’ own risk, as long as merger control approval is obtained subsequently, as such approval renders the contract to be deemed to have come into existence retroactively; and
- does not provide for any fines if a notifiable transaction is closed without prior merger control approval (but rather, only for the failure to notify / belated notifying of a notifiable transaction).
To fill this legal loophole, the following provisions will be included in the CA with effect of July 2014:
- a notifiable concentration may not be implemented without the prior authorization of the GVH; in particular, voting rights and the right to appoint the management may not be exercised without prior approval by the GVH.
This prohibition does not apply to the conclusion of the contract bringing about the concentration or the issuance of a public take-over bid or – on the basis of the above – the performance of such legal acts and declarations that are necessary for bringing about the concentration which do not yet result in exercising of the control rights by the acquirer.
- upon a prior reasoned request of the party obliged to file the notification, the GVH may allow the exercising of control rights, especially if it is necessary for maintaining the full value of the party’s investment.
Such derogation from the suspension clause might be made subject to conditions and obligations (limitation of control rights); at the same time, the GVH may oblige the parties to submit the documents on exercising their control rights (e.g. resolutions, etc). In its decision about the concentration, the GVH states whether the exercising of control rights was in line with the limitation of control rights which it had ordered earlier.
Contrary to the EU Merger Control Regulation (“ECMR”), it is unlikely that the parties would be entitled to apply for the derogation before notifying the planned concentration to the GVH.
- If the GVH does not authorize the concentration, any act or declaration resulting from the exercising of control rights in breach of the suspension clause (or in breach of the above imposed conditions and obligations) is null and void; the party exercising control rights in breach of the suspension clause or in breach of the conditions or obligations may not refer to the nullity and is liable for damages arising from the legal consequences of nullity.
- a daily fine (min. HUF 50,000 — max. HUF 200,000, with the total amount of the fine being capped at 10% of turnover) calculated until the start of the competition supervisory proceeding may be imposed for implementation of a merger which has not been notified. This maximum daily fine of HUF 200,000 is identical to that applied by the current rules for late notifying, while the minimum amount is newly introduced.
In view of the introduction of a suspension clause, the amendments introduce a shorter deadline (30 days instead of the currently applicable 45 days) for the GVH to assess a concentration in Phase I (while the deadline for a full – Phase II – proceeding remains four months). The amendments will be applicable to concentrations after 1 July 2014.
Further changes – exemption from merger clearance?
Pursuant to another legislative proposal recently adopted by the Hungarian Parliament an exception from the obligation to request the GVH’s authorisation has been introduced to Hungarian Competition Act. If a transaction is classified as being of “national strategic importance” by the government due to public interest – especially in order to preserve jobs and to insure the security of supply -, no merger control authorisation from the GVH is needed. This amendment has become effective on 22 November 2013.